A Letter to Eggo

Dear Eggo: 

Thank you very much for your comment on my last post, which was entitled “Lessons on Human Nature.”    I always appreciate comments because it makes me realize someone is reading my blog.    It doesn’t bother me when a reader disagrees with my views because I value diversity of thought.   Even though I don’t know who you are, I want you to know I appreciate the fact you are reading my blog and adding your comments from time to time.    

Your last comment pointed out that my story about the economics professor who failed an entire class is an urban legend.   An “urban legend” is defined by Wikipedia as a form of modern folklore consisting of stories thought to be factual by those circulating them.   As I said in my last post, I did not know whether the story about the economics professor was true or not.   I repeated the story because I thought the story—whether true or not—contained an important lesson about human nature. 

Some of our most important moral lessons are taught by means of stories.  Jesus, for example, used parables to illustrate a truth or lesson.   A parable is nothing more than a short story told to describe or illustrate a truth or lesson.  Jesus communicated with stories because they clearly and effectively illustrated his points in a manner to which his listeners could relate.   This form of teaching can be much more effective than an abstract presentation. 

Many children’s books also use stories to teach important life lessons.   Consider, for example, the story about “The Boy Who Cried Wolf” from Aesop’s fables, which teaches children about the importance of trust.   Another one of Aesop’s fables, “The Hare and the Tortoise,” makes the point that hard work and determination are more important than natural talent and skill.  The children’s book The Little Engine That Could teaches perseverance.   

I would also like to address your comment about the Social Security System.   You said you would sign up for my “anti-socialism” plan if you could be assured of receiving a larger Social Security check upon retirement than those who have paid less money into the system than you have.   Of course, I cannot give you the assurance you are seeking, but I know you are much less likely under socialism to benefit from your continued hard work and your increased payments into the Social Security System.   One of the goals of socialism is to transfer money from people like you, who have earned it, to those who have not.   Accordingly, an “anti-socialism” plan represents your best hope for obtaining the assurance you are seeking. 

The subject of our Social Security System reminds me of a new story I would like to tell for the first time.    Maybe I can start a new urban legend.   

Here is my story.   I have two glasses on my desk.   One glass used to be full but is now only half-full.   This glass represents my Individual Retirement Account, which consists of money I have saved over the last 38 years by making voluntary contributions to the 401(k) savings plans and other retirement plans sponsored by my employers.   In some cases, my employer matched a portion of my voluntary contributions.   Although this glass used to be full, it is now only half-full because I have lost almost half of the value of my IRA during the last 18 months.   The second glass on my desk is empty.   The empty glass represents the retirement benefit to which I am entitled under the Social Security System. 

Why is the glass representing my Social Security benefit empty?   It is empty because it has always been empty.   It has a hole in the bottom.   Every penny I have added to this glass over the years fell out through the hole in the bottom.   The government spent all of my money for other purposes.   I have nothing more than a promise from the government to pay me a retirement benefit as long as the government can afford to do so and chooses to do so.   The Social Security System is a Ponzi scheme.   The money contributed to the system by those who are retired is gone.  It was not set aside for their benefit.  The government is relying on current workers to pay the benefits due to those who have already retired.   Like all Ponzi schemes, the Social Security System will ultimately collapse. 

I have no assurance the government will continue to pay my Social Security benefits.    The government may well decide there is no need to continue my Social Security benefits because I have another half-full glass on my desk and there are other people with two empty glasses on their desks.   The fact that I worked hard to fill one of the two glasses on my desk and other people left both of their glasses empty may be irrelevant to the politicians who make and have the power to change the rules.  

The bottom line is that the Social Security System does not provide me with any security.   The glass representing my Social Security benefit is and always has been empty.   My only security comes from the half-full glass representing the money that remains in my IRA.   Even though I have suffered significant losses in this account, this account represents my money—at least until the government changes the rules and decides to take it from me.    If I die before I spend all the money in the half-full glass, or before the government takes it from me, then I can pass whatever is left in the glass along to my children.    My children will never realize any benefit from the money I have deposited into the glass representing the Social Security System. 

President Obama has promised to reform our Social Security System, and he has also promised to improve our health care system and reduce the cost of health care.   It occurs to me he will be able to reduce the cost of health care and reform our Social Security System all at the same time.   All he has to do is obtain control over the health care system, which he is likely to be successful in doing.   He can then implement rules to deny expensive health care treatments to the elderly on the grounds that the treatments are not cost effective.    This will kill two birds with one stone.  It will reduce the cost of health care by denying expensive treatments to the elderly, and it will reduce the burden on the Social Security System when elderly people die earlier than they otherwise would have and are no longer eligible to receive future Social Security benefits.   

In closing, Eggo, I hope you will join my “anti-socialism” plan.    It may be too late for the United States to turn away from socialism, but it’s the only hope we have.   Now it’s time for you to get back to work.   Those of us who are retired are depending on those of you who are still working to keep dropping money into the empty glass with the hole in the bottom.   We need to keep this Ponzi scheme going for a little while longer.    Sincerely, Wildcat   

Lessons on Human Nature

A friend told me a story this week about an experiment conducted by a professor at a major university.   I cannot verify whether the story is true, but it easily could be true if it is not.   The story demonstrates basic human nature, and I am sure all of us—if we are honest with ourselves—will be able to relate to it.    

As the story goes, an economics professor at the university said he had never failed a single student but had once failed an entire class. The class had insisted that socialism worked and that under socialism no one would be poor and no one would be rich, a great equalizer.  The professor decided to conduct an experiment with his class.  He announced that all grades would be averaged and everyone would receive the same grade so that no one would fail and no one would receive an A.  After the first test, the grades were averaged and everyone got a B.  The students who studied hard for the first test were upset, and the students who studied little were happy.   As the second test rolled around, the students who had studied little for the first test studied even less, and the ones who had studied hard for the first test decided they wanted a free ride too so they studied less.  The class average for the second test was a D!   No one was happy.   When the third test rolled around, the class average was an F. 

The scores never increased as bickering, blame, and name calling all resulted in hard feelings, and no one was willing to study for the benefit of everyone else.  Everyone failed.  The professor pointed out that socialism would ultimately fail for the same reasons.   People are willing to work hard if the rewards for hard work are great.   When the government takes away the rewards for hard work, no one will succeed because no one will try. 

This story reminds me of another example of human nature sent to me by another friend several months ago.    Under this story, an economics professor demonstrated the problems of government tax policies through the following example: 

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100.  If they paid their bill the way we pay our taxes, it would go something like this: 

The first four men (the poorest) would pay nothing. 

The fifth would pay $1. 

The sixth would pay $3. 

The seventh would pay $7. 

The eighth would pay $12. 

The ninth would pay $18. 

The tenth man (the richest) would pay $59. 

So that’s what they decided to do.  The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day the owner threw them a curve.  “Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily beer by $20.”   Drinks for the ten now cost just $80. 

The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected.  They would still drink for free.  But what about the other six men—the paying customers?   How could they divide the $20 windfall so that everyone would get his “fair share?”   They realized that $20 divided by six is $3.33.  But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink his beer.   So the bar owner suggested it would be fair to reduce each man’s bill by roughly the same amount, and he proceeded to work out the amounts each should pay.  And so: 

The fifth man, like the first four, now paid nothing (100% savings). 

The sixth now paid $2 instead of $3 (33%savings). 

The seventh now paid $5 instead of $7 (28%savings).
 

The eighth now paid $9 instead of $12 (25% savings).
 

The ninth now paid $14 instead of $18 (22% savings).
 

The tenth now paid $50 instead of $59 (16% savings).  

Each of the six was better off than before.  And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.  “I only got a dollar out of the $20,” declared the sixth man.  He pointed to the tenth man, “but he got $9!”   “Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar, too.  It’s unfair that he got nine times more than I!”  “That’s true!!” shouted the seventh man.  “Why should he get $9 back when I got only two?   The wealthy get all the breaks!”

“Wait a minute,” yelled the first four men in unison. “We didn’t get anything at all.  The system exploits the poor!”   The nine men surrounded the tenth man and beat him up. 

The next night the tenth man didn’t show up for drinks, so the nine sat down and had beers without him.  But when it came time to pay the bill, they discovered something important.  They didn’t have enough money between all of them for even half of the bill! 

The economics professor concluded by pointing out that his example demonstrates how our tax system works.   The people who pay the highest taxes normally get the most benefit from a tax reduction.   If you tax them too much, and attack them for being wealthy, they just may not show up anymore.   

Both of these stories, whether true or not, contain an important lesson.   Both stories are very realistic and demonstrate the risks of reducing the rewards for hard work and imposing excessive burdens on the wealthiest members of our society.